Note: It will
be useful for the reader to also see three other articles in this issue of 21st
that all have a bearing in one way or another on the issues raised by Scott
Kosch. See the "SpeedChoice Corporate Profile",
Matthew Oristano's "Data Over Wireless" piece,
and last but not least, Vale 's "Dolo" column.-- Ed.

Digital
technology has swiftly and radically transformed most media and communications
businesses. Now broadcast television's time has arrived. Although the public
may not be fully aware of the changes at hand, many industries are actively
involved in the rollout of digital television including broadcast, cable, satellite,
consumer electronics, computer, and entertainment. The driver of this change
in the United States is the Federal Communications Commission, which has taken
an active role by requiring broadcasters to convert to digital. Commercial network
affiliates (i.e., ABC, CBS, NBC, and Fox) in the top 10 markets must begin broadcasting
a digital signal by May 1999, and affiliates in the top 11 through 30 markets
must follow suit by November. All remaining commercial stations must file construction
permits with the FCC by November and be on-the-air by May 2002. How broadcasters
use this digital spectrum beyond broadcasting a digital version of the conventional
NTSC signal with a 4:3 aspect ratio remains unclear. On the other hand, satellite
broadcasters have pioneered digital broadcasting and the cable industry is rapidly
building an advanced digital infrastructure to support both broadband connectivity
and digital television.

The
public, nonetheless, has already begun to demand digital entertainment and content
from a more interactive medium, the Internet. Today nearly 80 million Americans
are online either from home or at work, and more than half of 16 to 34 year
olds use the Internet. Moreover, recent surveys report that people in homes
with Internet access watch 15 percent less television. The cable and satellite
broadcast industries are betting heavily on the convergence between the PC and
television by investing and establishing partnerships within the technology,
Internet, and consumer electronics industries. The key threat to broadcasters,
therefore, is the growing control of the viewer by the cable and DBS operators
as they integrate program guides, Internet access, enhanced TV, and VCR-like
control platforms into the viewing experience. The gauntlet has been thrown
down, and the broadcast industry must respond with conviction.

As
of February 1999, 51 television stations in the United States are now delivering
digital signals. By November network affiliates in the top 30 markets will have
to broadcast digitally, reaching over 60 percent of all households. The FCC
has granted this digital spectrum to incumbent broadcast companies without a
competitive auction process; however, as broadcasters are well aware, the conversion
to digital broadcasting is not without significant costs. CBS, for example,
has allocated $100 million to upgrade its 14 stations for digital broadcasts.
Similarly, ABC has already spent over $55 million to acquire digital equipment.
Most local stations and network affiliates, however, are expected to swallow
the majority of the capital costs for new digital transmitters, tower upgrades
or replacements, production equipment, and post-production facilities. These
costs, which can exceed the market value of many small stations, will total
$2 to $14 million per station. In sum, the current fragmentation of the broadcast
industry the aggressive, industry-wide investment that is necessary to mount
a robust competitive response to cable and satellite operators and the Internet.

Nevertheless,
where will the additional revenue come from to justify these costs? Broadcasters
are beginning to explore new business models; yet, without a critical mass of
consumer demand, assessing which opportunities are the most robust requires
thoughtful analysis. Broadcasters who are unprepared for the digital television
revolution may find themselves giving way to new entrants; whereas, those with
sound digital strategies will find the opportunities to expand market share,
dominate new markets, and enhance profitability.

Demand for
Digital Television

Market
penetration of digital TV sets and set-top boxes will largely determine consumer
demand for digital television. Of course, most people would prefer high definition
television (HDTV) for sporting events and movies, and many would find interactivity
within a television environment compelling. Notwithstanding consumer service preferences,
the market for TV sets that cost more than $5,000 is limited. In fact, CEMA conservatively
estimates that sales of digital TV sets will be limited to 150,000 units for 1999
and 600,000 units for 2000.

As
prices begin to fall the market will expand. There are 18 million households
? from a total of 100 million television households ? who have already purchased
TV sets priced at $2,000 or more. Furthermore, CEMA projects digital TV set
penetration will reach a minimum of 30 percent of households by 2006 with annual
unit sales exceeding 10.8 million. In addition to digital TV sets, many more
consumers will purchase digital set-top boxes, which can capture and convert
a digital signal for display on current analog TV sets. For a few hundred dollars,
set-top boxes will bridge the gap between consumer demand for digital television
services and the average household budget for consumer electronics. The combined
installed base of digital TV sets and set-top boxes should grow to over 60 million
units by the end of 2003 and then explode to 330 million units by the end of
2010 according to a recently published market study by International Data Corporation.
Although these numbers include some double counting ? for example, a DBS set-top
box connected to a HDTV set or more than one digital cable set-top in the home
? these projections clearly indicate that digital television will reach a critical
mass of consumers by 2001 and ubiquity sometime within the decade.

With
these numbers in mind, broadcasters need to assess their strategic options today.
Now is the right time to explore the opportunity for new service models within
digital television.

New Service
Models

Widespread
reception of digital television signals will make it possible for broadcasters
to provide a broad range of new services. Each of these new business models
must be assessed on a case-by-case basis in order to pursue a wise course of
action. Without taking into consideration consumer demand, box deployment, unique
broadcaster assets and capabilities, enabling technology requirements, and competitive
response, a broadcaster will have little information with which to make an informed
decision. Representative digital television service models include:

TV
Internet Portal - Aggregating excess spectrum to provide a continuously
updated, personalized, local and national portal service including news, weather,
sports, financial, city guides, and other subjects.

Enhanced Interactive Broadcasts - Simultaneous television and data or direct links from broadcast television to related interactive content.

Although
each of these models is distinct, some share related features. For instance,
targeted advertising, e-commerce, and direct marketing revenue streams can be
explored with many of these service models. Moreover, with a data rate of 19.44
Mbps for a digital broadcast signal as well as improvements in data compression
technology, broadcasters may choose to develop a hybrid model that includes
a synthesis of service models. Some service models will also require a response
back channel and strategic alliances with other companies in broadcasting, entertainment,
consumer electronics, and the Internet. Nevertheless, broadcasters should carefully
consider the abundance of new opportunities made available by the transition
to digital television.

Making the
Right Choice

Some
broadcasters are wary of taking a decisive posture regarding market entry into
digital broadcasting. They either are not comfortable with the role of early market
entrant or hold the belief that decisions they make today will have a profound
and irreversible effect on their business for the next 50 years. Despite these
justified reservations, broadcasters must also consider the possible negative
consequences of inaction. The broadcast industry has long been familiar with the
experimentation that takes place in the content programming world. New show pilots
are developed and tested, and many do not succeed. Nevertheless, without developing
and testing new content, broadcasters would be at a competitive disadvantage in
the battle for viewers. Even in the face of new sources of competition and falling
ratings, the value of television spectrum has appreciated exponentially over time
as a result of effectively managing media value. For broadcasters, experimenting
with and exploiting new opportunities in digital television will be a good long-term
value play, as the television platform remains the premier medium for advertisers.

The
challenge for broadcasters, thus, is to build media value ? the nexus of broadcast
spectrum, compelling content, and an attractive viewer base ? through the transition
to digital service models. For example, a broadcaster might conduct trials of
the multicast channels service model by offering distinct channel programming
to niche audiences. Targeted advertising consistently garners higher CPM rates
than mass market ads; therefore, multicasting could both augment the broadcaster's
ad inventory and raise CPMs. Similarly, interactive/response advertising, pioneered
by Internet advertising agencies, is highly valued by consumer focused advertisers.
Other forms of advertising ? such as yellow pages, classifieds, newspaper retail
ads, direct mail and consumer promotion ? can also be explored within new digital
television service models; this $200 billion market for non-electronic, localized
ad spending represents a previously untapped pool of revenue for digital broadcasters.

In
addition to these new and incremental sources for advertising revenue, broadcasters
can consider how to profit from transaction and subscription based service opportunities.
For broadcasters willing to experiment with a robust transactional back channel
over the phone lines, the opportunity to capture a share of the retail e-commerce
market is waiting. This market is expected to grow from $5 billion to more than
$24 billion by 2002. Moreover, consumers are now spending more than $40 billion
annually for video programming, video software, computer software, and subscriptions
to online services. Digital service models that look to gain market share within
these large and growing markets can also be explored. Finally, broadcasters
can even forge new service models that aggregate digital spectrum in a local
market to compete for the $30 billion a year that consumers spend on subscription
television.

Hypothetical
Business Case

To
illustrate the opportunities that broadcasters can explore, the Personal Finance
Channel provides one representative business case for a transaction driven digital
television service. This digital broadcast channel would be offered within a multicast
digital signal, providing financial market news and analysis during and after
market hours. For example, e-commerce applications and interactivity ? enabled
by a secure back channel and provided in partnership with an online brokerage
or news service ? would allow consumers to research market news and manage their
investment portfolio from home. Real time market activity could be monitored during
market hours, and consumers would explore more in-depth analysis and request further
information in the evening. Some examples of potential online partners would include
services such as E*Trade, ESchwab, Bloomberg, and Raging Bull. In addition complimentary,
consumer-oriented, financial content could include local postings of homes, instruction
regarding home finance, retirement planning, and insurance education. Correspondingly,
this Personal Finance Channel will be a valuable advertising and transactional
platform for other online brokerages such as Realtor.com, E-Loan, and InsWeb.

Our
analysis suggests that over 7.5 million online brokerage accounts are generating
340,000 trades per day, or roughly $175 million in monthly commissions in early
1999, and this valuable market space is projected to double by 2002. Similarly,
online mortgage origination is expected to reach $250 billion in 2003 (still
less than 18% of the whole market today), and annual premiums for insurance
products currently total $670 billion. The challenge, therefore, is to promote
the digital broadcast spectrum as a valuable medium for these new online industries
to utilize the broad reach of television. Considering that current transaction
focused television properties like QVC and the Home Shopping Network reach as
much as 70 percent of U.S. households, the digital broadcast spectrum can bring
many new services into the homes of consumers. By contrast, popular e-commerce
properties such as Amazon and Etoys reach only 16.1 percent and 6.8 percent
respectively of all domestic Internet users, according to Media Metrix.

The
penetration of digital television should outpace the residential online market
and reach near ubiquity as widespread consumer adoption accelerates. Our financial
models consistently indicate that this medium will be a valuable source for
both advertising and e-commerce, if broadcasters develop robust service models
to support these revenue streams.

Summary

For
broadcasters to build media value, exploit new Internet content, and prevent losing
ground to competitors, they must begin to explore new service models in earnest.
It is important to note, however, that decisions cannot be made hastily or without
sufficient examination of service model options. To explore these new digital
business opportunities, broadcasters need to assess their options against an analytical
framework of consumer demand, box deployment, unique broadcaster assets and capabilities,
enabling technology requirements, and competitive response.

Digital
spectrum enables broadcasters to explore market opportunities that were previously
inaccessible within the traditional analog broadcast paradigm. Some players
will emerge victorious and others will fall short. Nevertheless, broadcasters
must resolve to view the transition to digital television with optimism as they
devise distinct strategies to profit from new opportunities.